UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 (Mark
One)
 [X]  QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the quarterly period
ended September 30, 2008
  OR
 
 [ 
]  TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
 For
the transition period from ____________ to_____________
 
 
 Commission
file number 333 - 38558
 
 KODIAK
ENERGY, INC.
 
 (Exact
name of registrant as specified in its charter)
 
 
 Delaware
              65-0967706(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      No.)
 
 
 734
7th Avenue S.W. Calgary,
AB T2P 3P8
 (Address
of principal executive offices - Zip code)
 
 (403)
262-8044
 (Registrant's
telephone number, including area code)
 
 Not
Applicable
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.   Yes X  No
__
 
 Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      Accelerated Filer __
              Accelerated
      Filer _X_Non-Accelerated
      Filer __ (Do
      not check if a smaller reporting company)
              Smaller
      Reporting Company __
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of The Exchange Act) Yes __   No
_X_
 
 APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS:
 
 Check
whether the registrant filed all documents and reports required to be filed by
Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes _X  No
__
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 
 State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the
latest practicable date: 110,023,998 common shares, $.001 par value, as at
November 7, 2008.
   
  KODIAK ENERGY, INC.
 INDEX
 
 PART
      I.
              FINANCIAL INFORMATION
              3ITEM
      1.
              FINANCIAL STATEMENTS
              3Consolidated Balance Sheets (unaudited)
              3Consolidated Statement of Shareholders’ Equity
      (unaudited)
              4Consolidated Statements of Operations
      (unaudited)
              4Consolidated Statements of Cash Flows
      (unaudited)
              5Notes to Consolidated Financial Statements
      (unaudited)
              6ITEM
      2.
              MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
              20ITEM
      3.
              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
              27ITEM
      4.
              CONTROLS AND PROCEDURES
              27PART
      II.
              OTHER INFORMATION
              29ITEM
      1.
              LEGAL PROCEEDINGS
              29ITEM
      1A.
              RISK FACTORS
              29ITEM
      2.
              UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
              33ITEM
      3.
              DEFAULTS UPON SENIOR SECURITIES
              33ITEM
      4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
              33ITEM
      5.
              OTHER INFORMATION
              33ITEM
      6.
              EXHIBITS
              33
 
   
 
 PART I. FINANCIAL INFORMATION
 
 ITEM 1.  FINANCIAL STATEMENTS
 
 KODIAK ENERGY, INC.
 Consolidated
Balance Sheets
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 
 September
              
              
              December30,
      2008
              
              
              
              31,
      2007(Unaudited)
              
              
              (Audited)AssetsCurrent
      Assets:Cash
      and Short Term Deposits
              
              $
              54,857
              
              
              $
              8,983,682Accounts
      Receivable (Note 4)
              
              
              1,010,428
              
              
              
              1,214,253Prepaid
      Expenses and Deposits
              
              
              91,897
              
              
              
              90,4751,157,182
              
              
              
              10,288,410Other
      Assets (Note 5)
              
              
              332,425
              
              
              
              359,353Capital
      Assets (Note 6):Unproved
      Oil & Gas Properties Excluded FromAmortization
      – Based on Full Cost Accounting
              
              
              38,267,882
              
              
              
              23,967,351Property
      & Equipment
              
              
              80,392
              
              
              
              75,65438,348,274
              
              
              
              24,043,005Total
      Assets
              
              $
              39,837,881
              
              
              $
              34,690,768Liabilities
      and Shareholders' EquityCurrent
      Liabilities:Accounts
      Payable
              
              $
              1,391,054
              
              
              $
              1,547,273Accrued
      Liabilities
              
              
              142,027
              
              
              
              755,2821,533,081
              
              
              
              2,302,555Long-term
      Liabilities (Note 7)
              
              
              44,937
              
              
              
              110,955Asset
      Retirement Obligations (Note 8)
              
              
              210,764
              
              
              
              151,814Deferred
      Income Taxes (Note 9)
              
              
              52,000
              
              
              
              57,0001,840,782
              
              
              
              2,622,324Shareholders'
      EquityShare
      Capital (Note 10):Authorized
      300,000,000 Common Shares Par Value.001
      Each; Issued and Outstanding110,023,998
      (2007 – 106,692,498) Shares
              
              
              110,024
              
              
              
              106,692Additional
      Paid in Capital
              
              
              46,756,714
              
              
              
              39,143,392Other
      Comprehensive Loss
              
              
              (436,242
              )
              
              
              (342,201
              )Deficit
      Accumulated during the Exploration Stage
              
              
              (8,433,397
              )
              
              
              (6,839,439
              )37,997,099
              
              
              
              32,068,444Total
      Liabilities and Equity
              
              $
              39,837,881
              
              
              $
              34,690,768
  (See
accompanying notes to the consolidated financial statements)
 
 Contingencies
and commitments (Note 13)
  Return to Table of Contents
 3
 
 KODIAK ENERGY, INC.
 Unaudited
Consolidated Statements of Shareholders’ Equity
 Nine
Months Ended September 30, 2008
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 
 Number
      ofCommonShares
              
              
              Amount
              
              
              AdditionalPaid in Capital
              
              
              Deficit
      AccumulatedDuring theExploration Stage
              
              
              AccumulatedOtherComprehensiveLoss
              
              
              SharesIssuable
              
              
              TotalShareholders’EquityBalance
      at December 31, 2007
              
              
              106,692,498
              
              
              $
              106,692
              
              
              $
              39,143,392
              
              
              $
              (6,839,439
              )
              
              $
              (342,201
              )
              
              $
              -
              
              
              $
              32,068,444Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,593,958
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,593,958
              )Foreign
      currency translation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (94,041
              )
              
              
              
              
              
              
              ( 94,041
              )-
              
              
              
              -
              
              
              
              -
              
              
              
              (1,593,958
              )
              
              
              (94,041
              )
              
              
              
              
              
              
              (1,687,999
              )Common
      shares issued
              
              
              3,331,500
              
              
              
              3,332
              
              
              
              7,105,532
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              7,108,864Stock-based
      Compensation
              
              
              -
              
              
              
              -
              
              
              
              507,790
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              507,790Balance
      at September 30, 2008
              
              
              110,023,998
              
              
              $
              110,024
              
              
              $
              46,756,714
              
              
              $
              (8,433,397
              )
              
              $
              (436,242
              )
              
              
              
              
              
              $
              37,997,099
 
 (See
accompanying notes to the  consolidated financial statements)
 
 
 Kodiak Energy Inc.
 Unaudited
Consolidated Statements of Operations
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
  Three
      Months Ended September 30, 2008
              
              
              Three
      Months Ended September 30, 2007
              
              
              Nine
      Months Ended September 30, 2008
              
              
              Nine
      Months Ended September 30, 2007
              
              
              Cumulative Since
                Inception
      Apr. 7,
                2004
      to September 30, 2008INCOME
      DURING THE EVALUATION PERIOD
              
              $
              -
              
              
              $
              (202
              )
              
              $
              46
              
              
              $
              225
              
              
              $
              27,405EXPENSESOperating
              
              
              3,590
              
              
              
              549
              
              
              
              8,863
              
              
              
              12,149
              
              
              
              42,978General
      and Administrative
              
              
              550,822
              
              
              
              793,936
              
              
              
              1,620,905
              
              
              
              1,647,925
              
              
              
              5,492,480Stock-based
      Investor Relations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              337,500Depletion,
      Depreciation and AccretionIncluding
      Ceiling Test ImpairmentWrite-downs
              
              
              16,441
              
              
              
              12,900
              
              
              
              41,718
              
              
              
              35,043
              
              
              
              1,768,815Interest
              
              
              -
              
              
              
              75,238
              
              
              
              1,257
              
              
              
              94,056
              
              
              
              904,151570,853
              
              
              
              882,623
              
              
              
              1,672,743
              
              
              
              1,789,173
              
              
              
              8,542,196Loss
      Before Other Income
              
              
              (570,853
              )
              
              
              (882,825
              )
              
              
              (1,672,697
              )
              
              
              (1,788,948
              )
              
              
              (8,518,519
              )Other
      Income (Expense)Loss
      from valuation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (25,000
              )Interest
      Income
              
              
              12,239
              
              
              
              (1,400
              )
              
              
              73,739
              
              
              
              (1,909
              )
              
              
              162,122(12,239
              )
              
              
              (1,400
              )
              
              
              (73,739
              )
              
              
              (1,909
              )
              
              
              137,122Net
      Loss before taxes
              
              
              (558,614
              )
              
              
              (881,425
              )
              
              
              (1,598,958
              )
              
              
              (1,787,039
              )
              
              
              (8,381,397
              )Deferred
      Income Taxes (Recovery)
              
              
              -
              
              
              
              (3,468
              )
              
              
              (5,000
              )
              
              
              52,012
              
              
              
              52,000NET
      LOSS
              
              $
              (558,614
              )
              
              $
              (877,957
              )
              
              $
              (1,593,958
              )
              
              $
              (1,839,051
              )
              
              $
              (8,433,397
              )




)




Loss per share data (Note 12)




Return to Table of Contents
 4





KODIAK ENERGY, INC.


Unaudited
Consolidated Statements of Cash Flows


(Exploration
Stage Company Going Concern Uncertainty – Note 1)




Three
      Months Ended
                
                
                Three
      Months Ended
                
                
                Nine
      Months Ended
                
                
                Nine
      Months Ended
                
                
                Cumulative
      Since Inception April 7, 2004 toSeptember
                
                
                September
                
                
                September
                
                
                September
                
                
                September30,
      2008
                
                
                
                30,
      2007
                
                
                
                30,
      2008
                
                
                
                30,
      2007
                
                
                
                30,
      2008Operating
      ActivitiesNet
      Loss
                
                $
                (558,614
                )
                
                $
                (877,957
                )
                
                $
                (1,593,958
                )
                
                $
                (1,839,051
                )
                
                $
                (8,433,397
                )Adjustments
      to reconcile net loss tonet cash used in operating activities:Depletion, Depreciation and Accretion
                
                
                16,441
                
                
                
                12,900
                
                
                
                41,718
                
                
                
                35,043
                
                
                
                1,768,815Non-cash Interest Expense
                
                
                -
                
                
                
                (18,818
                )
                
                
                -
                
                
                
                -
                
                
                
                808,811Stock-Based Investor Relations Expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                337,500Stock-Based Compensation
                
                
                152,185
                
                
                
                190,239
                
                
                
                507,790
                
                
                
                469,322
                
                
                
                1,220,893Deferred Income Taxes (Recovery)
                
                
                -
                
                
                
                (3,468
                )
                
                
                (5,000
                )
                
                
                52,012
                
                
                
                52,000Bad Debts Written Off
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                11,908Contributions to Capital
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                900Non-Cash
      Working Capital Changes (Note 17)
                
                
                219,897
                
                
                
                (15,335
                )
                
                
                836,234
                
                
                
                (94,523
                )
                
                
                306,911Net
      Cash Used In Operating Activities
                
                
                (170,091
                )
                
                
                (712,439
                )
                
                
                (213,216
                )
                
                
                (1,377,197
                )
                
                
                (3,925,659
                )Investment
      Activities:Additions To Capital Assets
                
                
                (420,613
                )
                
                
                (2,176,090
                )
                
                
                (11,277,874
                )
                
                
                (7,071,453
                )
                
                
                (21,637,874
                )Additions To Other Assets
                
                
                13,878
                
                
                
                (61,740
                )
                
                
                26,928
                
                
                
                (66,960
                )
                
                
                (332,425
                )Net
      Cash Used In Investment Activities
                
                
                (406,735
                )
                
                
                (2,237,830
                )
                
                
                (11,250,946
                )
                
                
                (7,138,413
                )
                
                
                (21,970,299
                )Financing
      Activities:Shares Issued and Issuable
                
                
                (78,726
                )
                
                
                8,926,576
                
                
                
                2,695,396
                
                
                
                12,372,602
                
                
                
                26,342,121Long term liabilities
                
                
                (1,961
                )
                
                
                300,000
                
                
                
                (66,018
                )
                
                
                3,300,000
                
                
                
                44,937Net
      Cash Provided By (Used In) Financing Activities
                
                
                (80,687
                )
                
                
                9,226,576
                
                
                
                2,629,378
                
                
                
                15,672,602
                
                
                
                26,387,058Foreign
      Currency Translation
                
                
                25,229
                
                
                
                126,358
                
                
                
                (94,041
                )
                
                
                (191,951
                )
                
                
                (436,242
                )Net
      Cash Increase (Decrease)
                
                
                (682,742
                )
                
                
                6,049,949
                
                
                
                (8,928,825
                )
                
                
                6,965,041
                
                
                
                54,857Cash
      beginning of period
                
                
                737,599
                
                
                
                1,263,438
                
                
                
                8,983,682
                
                
                
                448,346
                
                
                
                -Cash
      end of period
                
                $
                54,857
                
                
                $
                7,413,387
                
                
                $
                54,857
                
                
                $
                7,413,387
                
                
                $
                54,857Cash
      is comprised of:Balances with banks
                
                $
                54,857
                
                
                $
                7,413,387
                
                
                $
                54,857
                
                
                $
                7,413,387
                
                
                $
                54,857Short-term deposits
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                54,857
                
                
                $
                7,413,387
                
                
                $
                54,857
                
                
                $
                7,413,387
                
                
                $
                54,857




(See
accompanying notes to the consolidated financial statements)







Return to Table of Contents
 5




KODIAK ENERGY, INC.


NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


For the
Nine Months Ended September 30, 2008 and 2007


Stated in
US dollars








1.   ORGANIZATION,
BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY





The
accompanying consolidated financial statements include the accounts of Kodiak
Energy Inc. and subsidiaries (collectively “Kodiak”, the “Company”, “we”, “us”
or “our”) as of September 30, 2008  and December 31, 2007 and for the
three and nine months ended September 30, 2008 and 2007 and for the cumulative
period from April 7, 2004 (inception) until September 30, 2008, and are
presented in accordance with generally accepted accounting principles in the
United States of America (“U. S. GAAP”).





The
Company was incorporated under the laws of the state of Delaware on December 15,
1999 under the name “Island Critical Care, Corp.” with authorized common stock
of 50,000,000 shares with a par value of $0.001. On December 30, 2004 the name
was changed to “Kodiak Energy, Inc.” and the authorized common stock was
increased to 100,000,000 shares with the same par value. On January 17, 2005 the
Company affected a reverse split of 100 outstanding shares for one share. These
consolidated financial statements have been prepared showing post split shares
from inception. The Company was engaged in the development of the manufacture
and distribution of medical instrumentation and it became inactive after the
bankruptcy outlined below. During 2006, the Company increased its authorized
capital to 300,000,000 common shares.





The
Company is in the exploration stage and its efforts have been principally
devoted to the raising of capital, organizational infrastructure development,
the acquisition of oil and gas properties and the initial stages of exploration
to establish reserves for the purpose of future extraction of
resources.





Bankruptcy





On
February 5, 2003 the Company filed a petition for bankruptcy in the District of
Prince Edward Island, Division No. 01-Prince Edward Island Court No. 1713,
Estate No. 51-104460, titled “Island Critical Care Corp.”. The Company emerged
from bankruptcy pursuant to a Bankruptcy Court Order entered on April 7, 2004
with no remaining assets or liabilities and adopted Fresh Start
Accounting.





The terms
of the bankruptcy settlement included the authorization for the issuance of
150,000 post split restricted common shares in exchange for $25,000, which was
paid into the bankruptcy court by the recipient of the shares.





The
Company emerged from bankruptcy as an exploration stage company.





Going Concern
Uncertainty





These
consolidated financial statements have been prepared assuming the Company will
continue as a going concern, which presumes the realization of assets and
discharge of liabilities in the normal course of business for the foreseeable
future. The Company has not generated positive cash flow since inception and has
incurred operating losses and will need additional working capital for
completion of its planned 2008 and future programs. These conditions raise doubt
about the Company’s ability to continue as a going concern. Continuation of the
Company as a going concern is dependent upon obtaining sufficient working
capital to finance ongoing operations. The management of the Company has
developed a strategy to address this uncertainty, including additional equity
and debt financing and some divestitures; however, there are no assurances that
any such financing or divestitures can be completed on favorable terms, if at
all, or that the Company will generate positive cash flow. These financial
statements do not reflect the adjustments or reclassification of assets and
liabilities that would be necessary if the Company were unable to continue its
operations.








Return to Table of Contents
 6





2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Basis of
Presentation





These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Kodiak Petroleum ULC, Kodiak Petroleum (Montana),
Inc., and Kodiak Petroleum (Utah), Inc. In British Columbia, Canada, the Company
operates under the assumed name of Kodiak Bear Energy, Inc. All intercompany
accounts and transactions have been eliminated.





Use of Estimates in the
Preparation of Financial Statements





The
preparation of financial statements in conformity with U. S. GAAP requires
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Although these
estimates are based on the knowledge of current events and actions the Company
may undertake in the future, they may ultimately differ from actual results.
Included in these estimates are assumptions about allowances for valuation of
deferred tax assets. Accounts receivable are stated after evaluation as to their
collectability and an appropriate allowance for doubtful accounts is provided
where considered necessary. The provision for asset retirement obligation,
depletion, as well as management’s impairment assessment on its oil and gas
properties and other long lived assets are based on estimates and by their
nature, these estimates are subject to measurement uncertainty and the effect on
the financial statements of changes in these estimates, in future periods, could
be significant. These estimates and assumptions are reviewed periodically and,
as adjustments become necessary, they are reported in earnings in the periods in
which they become known.





Joint Venture
Operations





In
instances where the Company’s oil and gas activities are conducted jointly with
others, the Company’s accounts reflect only its proportionate interest in such
activities.





Cash and Short-term
Deposits





Cash
consists of balances with financial institutions and investments in money market
instruments, which have terms to maturity of three months or less at time of
purchase.





Oil and Gas
Properties





Under the
full cost method of accounting for oil and gas operations, all costs associated
with the exploration for and development of oil and gas reserves are capitalized
on a country-by-country basis. Such costs include land acquisition costs,
geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells,
production equipment and overhead charges directly related to acquisition,
exploration and development activities. Proceeds from the sale of oil and gas
properties are applied against capitalized costs with no gain or loss
recognized, unless such a sale would significantly alter the rate of depletion
and depreciation in a particular country, in which case a gain or loss on
disposal is recorded.





Capitalized
costs within each country are depleted and depreciated on the unit-of-production
method based on the estimated gross proved reserves as determined by independent
petroleum engineers. Oil and gas reserves and production are converted into
equivalent units on the basis of 6,000 cubic feet of natural gas to one barrel
of oil. Depletion and depreciation is calculated using the capitalized costs,
including estimated asset retirement costs, plus the estimated future costs to
be incurred in developing proved reserves, net of estimated salvage
value.





An
impairment loss is recognized in net earnings if the carrying amount of a cost
center exceeds the “cost center ceiling”. The carrying amount of the cost center
includes the capitalized costs of proved oil and natural gas properties, net of
accumulated depletion and deferred income taxes and the cost center ceiling is
the present value of the estimated future net cash flows from proved oil and
natural gas reserves discounted at ten percent (net of related tax effects) plus
the lower of cost or fair value of unproved properties included in the costs
being amortized (and/or the costs of unproved properties that have been subject
to a separate impairment test and contain no probable reserves).








Return to Table of Contents
 7





Costs of
acquiring and evaluating unproved properties and major development projects are
initially excluded from the depletion and depreciation calculation until it is
determined whether or not proved reserves can be assigned to such properties.
Costs of unproved properties and major development projects are transferred to
depletable costs based on the percentage of reserves assigned to each project
over the expected total reserves when the project was initiated. These costs are
assessed periodically to ascertain whether impairment has occurred.





Property and
Equipment





Property
and equipment is recorded at cost. Depreciation of assets is provided by use of
a declining balance method over the estimated useful lives of the related
assets. Expenditures for replacements, renewals, and betterments are
capitalized. Maintenance and repairs are charged to operations as
incurred.





Asset Retirement
Obligations





The
Company recognizes a liability for asset retirement obligations in the period in
which they are incurred and in which a reasonable estimate of such costs can be
made. Asset retirement obligations include those legal obligations where the
Company will be required to retire tangible long-lived assets such as producing
well sites. The asset retirement obligation is measured at fair value and
recorded as a liability and capitalized as part of the cost of the related
long-lived asset as an asset retirement cost. The asset retirement obligation
accretes until the time the asset retirement obligation is expected to settle
while the asset retirement costs included in oil and gas properties are
amortized using the unit-of-production method.





Amortization
of asset retirement costs and accretion of the asset retirement obligation are
included in depletion, depreciation and accretion. Actual asset retirement costs
are recorded against the obligation when incurred. Any difference between the
recorded asset retirement obligations and the actual retirement costs incurred
is recorded in depletion, depreciation and accretion.





Environmental





Oil and
gas activities are subject to extensive federal, provincial, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites.





Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a non-capital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated. To date, the Company has not recognized any environmental obligations
as production has been insignificant and we have not actively produced since
October, 2006.





Income
Taxes





Income
taxes are determined using the liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. In addition, a valuation allowance is established to reduce any deferred
tax asset for which it is determined that it is more likely than not that some
portion of the deferred tax asset will not be realized.








Return to Table of Contents
 8





Per FASB
Interpretation (FIN 48) (See Note 9) under the liability method, it is the
Company’s policy to provide for uncertain tax positions and the related interest
and penalties based upon management’s assessment of whether a tax benefit is
more likely than not to be sustained upon examination by tax authorities. At
September 30, 2008, the Company believes it has appropriately accounted for any
unrecognized tax benefits. To the extent the Company prevails in matters for
which a liability for an unrecognized benefit is established or is required to
pay amounts in excess of the liability, the Company’s effective tax rate in a
given financial statement period may be affected. Interest and penalties
associated with the Company’s tax positions are recorded as Interest
Expense.





Stock-Based
Compensation





The
Company records compensation expense in the Consolidated Financial Statements
for share based payments using the fair value method pursuant to Financial
Accounting Standards Board Statement (“FASB”) No. 123R. The fair value of
share-based compensation to employees will be determined using an option pricing
model at the time of grant. Fair value for common shares issued for goods or
services rendered by non-employees are measured based on the fair value of the
goods or services received. Stock-based compensation expense is included in
general and administrative expense with a corresponding increase to Additional
Paid in Capital. Upon the exercise of the stock options, consideration paid
together with the previously recognized Additional Paid in Capital is recorded
as an increase in share capital.





Foreign Currency
Translation





The
functional currency for the Company’s foreign operations is the Canadian dollar.
The translation from the applicable foreign currencies to U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date, while income, expenses and cash flows are translated at
the average exchange rates for the period. The resulting translation adjustments
are recorded as a component of other comprehensive income. Gains or losses
resulting from foreign currency transactions are included in other
income/expenses.





Revenue
Recognition





Revenues
from the sale of petroleum and natural gas are recorded when title passes from
the Company to its petroleum and/or natural gas purchaser and collectability is
reasonably assured. The Company will begin recording revenue once it is
determined there are proved reserves.





Flow-through
Shares





The
Company finances a portion of its oil and gas exploration activities in Canada
through the issue of flow-through shares. The exploration and development
expenditures funded by flow-through shares are renounced to subscribers in
accordance with the Income Tax Act (Canada).





Proceeds
from the issuance of such flow-through shares are to be allocated between the
sale of the shares and the sale of the tax benefits. The allocation is made
based on the difference between the amount the investor pays for the
flow-through shares and the fair value of the existing shares at the time the
flow-through shares were issued. A liability is recognized for this difference
which is reversed upon the renunciation of the tax benefit. The difference
between this liability and the deferred tax liability is recorded in
earnings.





Loss Per Common
Share





Basic
earnings/loss per common share is computed by dividing net earnings/loss by the
weighted average number of common shares outstanding for the period. Diluted
earnings/loss per common share is computed after giving effect to all dilutive
potential common shares that were outstanding during the period. Dilutive
potential common shares consist of incremental shares issuable upon exercise of
stock options and warrants, contingent stock, conversion of debentures and
preferred stock outstanding. The dilutive effect of potential common shares is
not considered in the EPS calculations for these periods if the impact would
have been anti-dilutive.








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 9





3.  RECENT
ACCOUNTING PRONOUNCEMENTS





SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159). In February 2007, the FASB issued SFAS No. 159, which permits
entities to choose to measure many new financial instruments and certain other
items at fair value. The Company adopted SFAS No. 159 effective January 1, 2008,
and did not elect the fair value option for any existing items.





The
following new accounting standards have been issued, but have not yet been
adopted or fully adopted by the Company:





In
November, 2007, FASB issued SFAS No. 141(R), Business Combination. FAS 141(R)
will change how business acquisitions are accounted for and will impact
financial statements both on the acquisition date and in subsequent periods. FAS
141(R) is effective for both public and private companies for fiscal years
beginning on or after December 15, 2008. FAS 141(R) will be applied
prospectively. Early adoption is prohibited. The Company has not yet determined
this pronouncement’s potential impact.





SFAS No.
157, “Fair Value Measurements” (SFAS No. 157). In September 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 157, which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No 157 does not require any new fair value measurements. However, in some
cases, the application of SFAS No. 157 may change the Company’s current practice
for measuring and disclosing fair values under other accounting pronouncements
that require or permit fair value measurements. Under SFAS No. 157, fair value
refers to the price that would be received to sell an asset or paid to transfer
an liability in an orderly transaction between market participants in the
principal or most advantageous market. The standard clarifies that fair value
should be based on the assumptions market participants would use when pricing
the asset or liability. In February, 2008, the FASB issued Staff Position No
157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which delays
the effective date of SFAS No. 157 for all non-financial assets and liabilities,
except those that are recognized or disclosed at fair value in the Financial
statements on a recurring basis until fiscal years beginning after November 15,
2008. The Company adopted the provisions of SFAS No. 157 for assets and
liabilities recognized at fair value on a recurring basis effective January 1,
2008. The partial adoption of SFAS No. 157 did not have a material impact on the
Company’s Financial Statements. We do not currently anticipate that full
adoption in 2009 will materially impact the Company’s results of operations or
financial condition.





SFAS No.
162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No, 162).
In May, 2008, the FASB issued SFAS No. 162, which identifies the sources of
accounting principles and a prioritized framework for selecting the principles
to be used for preparation of the financial statements of nongovernmental
agencies that are presented in conformity with U.S. GAAP. SFAS No. 162 replaces
the U.S. GAAP hierarchy specified in the American Institute of Certified Public
Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS
No. 162 is effective 60 days following the SEC’s approval on September 16, 2008
of the Public Company Oversight Board amendments to remove the U.S. GAAP
hierarchy from the auditing standards. As a result, we will adopt SFAS No. 162
in the fourth quarter of our fiscal year 2008. We do not expect SFAS No. 162 to
have a material impact on our financial position, results of operations or cash
flows.








4.  ACCOUNTS
RECEIVABLE





Accounts
receivable consist of the following:


September
            
            
            December30,
    2008
            
            
            
            31,
    2007Non-operating
      Partner joint venture accounts
            
            $
            492
            
            
            $
            454,179Operator
      cash call advances
            
            
            -
            
            
            
            76,388Government
      of Canada Goods and Services Tax Claims
            
            
            40,035
            
            
            
            621,254Accrued
      interest receivable
            
            
            -
            
            
            
            57,096Amount
      due from Brink Energy Ltd. (Note 13)
            
            
            950,190
            
            
            
            -Other
            
            
            19,711
            
            
            
            5,336$
            1,010,428
            
            
            $
            1,214,253





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 10





5.  OTHER
ASSETS





Other
assets represent long term deposits required by regulatory authorities for
environmental obligations relating to well abandonment and site restoration
activities.





September
            
            
            December30, 2008
            
            
            
            31, 2007Alberta
      Energy and Utility Board Drilling Deposit
            
            $
            83,611
            
            
            $
            87,518Alberta
      Energy Royalty Deposit
            
            
            -
            
            
            
            4,723British
      Columbia Oil and Gas Commission Deposit
            
            
            248,814
            
            
            
            267,112$
            332,425
            
            
            $
            359,353








6.
CAPITAL ASSETS


Net
      BookAccumulated
            
            
            ValueDepreciation
            
            
            SeptemberCost
            
            
            and
      Depletion
            
            
            
            30,
    2008Oil
      and Gas Properties:Canada
            
            $
            29,578,203
            
            
            $
            1,651,037
            
            
            $
            27,927,166United
      States
            
            
            10,340,716
            
            
            
            -
            
            
            
            10,340,716Sub-total
            
            
            39,918,919
            
            
            
            1,651,037
            
            
            
            38,267,882Furniture
      and Fixtures
            
            
            156,779
            
            
            
            76,387
            
            
            
            80,392Total
            
            $
            40,075,698
            
            
            $
            1,727,424
            
            
            $
            38,348,274Net
      BookAccumulated
            
            
            ValueDepreciation
            
            
            DecemberCost
            
            
            And
      Depletion
            
            
            
            31,
    2007Oil
      and gas Properties:Canada
            
            $
            18,595,042
            
            
            $
            1,651,037
            
            
            $
            16,944,005United
      States
            
            
            7,023,346
            
            
            
            -
            
            
            
            7,023,346Sub-total
            
            
            25,618,388
            
            
            
            1,651,037
            
            
            
            23,967,351Furniture
      and Fixtures
            
            
            128,412
            
            
            
            52,758
            
            
            
            75,654Total
            
            $
            25,746,800
            
            
            $
            1,703,795
            
            
            $
            24,043,005




During
the nine months ended September 30, 2008, the Company has capitalized $267,030
(December 31, 2007 - $ 193,173) of general and administrative personnel costs
attributable to acquisition, exploration and development
activities.




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 11




Unproved
Properties





Included
in oil and gas properties are the following costs related to Canadian and United
States unproved properties, valued at cost, that have been excluded from costs
subject to depletion.




September
              
              
              December30,
      2008
              
              
              
              31,
      2007CanadaLand
      acquisition and retention
              
              $
              15,938,745
              
              
              $
              9,284,017Geological
      and geophysical costs
              
              
              10,494,023
              
              
              
              6,371,954Exploratory
      drilling
              
              
              1,339,105
              
              
              
              1,114,763Tangible
      equipment and facilities
              
              
              53,616
              
              
              
              127,217Other
              
              
              101,677
              
              
              
              46,054$
              27,927,166
              
              
              $
              16,944,005United
      StatesLand
      acquisition and retention
              
              $
              6,757,908
              
              
              $
              6,206,389Geological
      and geophysical costs
              
              
              941,836
              
              
              
              383,800Exploratory
      drilling
              
              
              2,478,768
              
              
              
              409,246Tangible
      equipment and facilities
              
              
              82,395
              
              
              
              -Other
              
              
              79,809
              
              
              
              23,911$
              10,340,716
              
              
              $
              7,023,346$
              38,267,882
              
              
              $
              23,967,351




In
Canada, winter drilling programs are planned for 2008-10 for our North West
Territories property and a stimulation and horizontal drilling program is
planned for our British Columbia property. In the United States, an initial
seismic and drilling program has been conducted on our New Mexico property with
a comprehensive feasibility study to follow. These planned activities, when
completed, will enable the Company to evaluate the economic viability of these
properties. It is estimated by management that the unproved property costs
associated with these properties, which in the aggregate constitutes
approximately $36,700,000 of our total unproved property costs as at September
30, 2008, will be included in costs subject to depletion by 2010.





Ceiling
Test





The
Company has performed ceiling tests for its Canadian and United States
geographical cost centers and has determined that no impairment exists as of
September 30, 2008. As of December 31, 2007, the carrying value of the Company’s
unproved properties in its Canadian and United States cost centers were assessed
by management and costs attributable to certain Canadian cost center properties
were determined to be unsupportable. Consequently, a ceiling test impairment
write-down as of December 31, 2007 of $174,380 was recorded and included in
depletion, depreciation and accretion for 2007. No impairment existed in the
United States cost center as of December 31, 2007.








7.  LONG
TERM LIABILITIES





As of
September 30, 2008, the Company held $ 44,937 (December 31, 2007 - $110,955) in
funds advanced by partners for their share of a drilling deposit required to be
lodged by the Company with the British Columbia Oil and Gas Commission (See Note
5) as security for future well abandonment and site restoration
activities.








8. ASSET
RETIREMENT OBLIGATIONS





Changes
in the carrying amounts of the asset retirement obligations associated with the
Company’s oil and natural gas properties are as follows:




Asset
      Retirement Obligations, December 31, 2007
              
              $
              151,814Obligations
      incurred
              
              
              82,914Retirements
      incurred
              
              
              (38,287
              )Accretion
              
              
              14,323Asset
      retirement obligations, September 30, 2008
              
              $
              210,764





At
September 30, 2008, the estimated total undiscounted amount required to settle
the asset retirement obligations was $ 336,528 (December 31, 2007 - $213,880).
These obligations will be settled at the end of the useful lives of the
underlying assets, which currently extends up to 8 years into the future. This
amount has been discounted using a credit adjusted risk-free interest rate of
7.5% and a rate of inflation of 2.5%.





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 12





9.
DEFERRED INCOME TAXES




At
September 30, 2008, the Company's deferred tax asset is attributable to its net
operating loss carry forward of approximately $16,814,000 (December 31, 2007 -
$11,284,000), which will expire if not utilized in the years 2024 to 2028. Of
this amount, approximately $410,000 (December 31, 2007 - $402,000) is
attributable to the Company's Canadian operations. As reflected below, this
benefit has been fully offset by a valuation allowance based on management's
determination that it is not more likely than not that some or all of this
benefit will be realized.






For the
periods ended September 30, 2008, September 30, 2007 and for the cumulative
period April 7, 2004 (Date of Inception) to September 30, 2008, a reconciliation
of income tax benefit at the U.S. federal statutory rate to income tax benefit
at the Company's effective tax rates is as follows:




2008
            
            
            2007
            
            
            CumulativeIncome
      tax benefit at statutory rate
            
            $
            534,000
            
            
            $
            638,000
            
            
            $
            3,031,000Permanent
      Differences
            
            
            3,000
            
            
            
            2,000
            
            
            
            (407,000
            )State
      tax benefit, net of federal taxes
            
            
            214,000
            
            
            
            28,000
            
            
            
            267,000Foreign
      taxes, net of federal benefit
            
            
            (5,000
            )
            
            
            (12,000
            )
            
            
            3,000Change
      in valuation allowance
            
            
            (751,000
            )
            
            
            (604,000
            )
            
            
            (2,842,000
            )Income
      tax expense (recovery) at effective rate
            
            $
            (5,000
            )
            
            
            52,000
            
            
            $
            52,000





Deferred
tax assets (liabilities) at September 30, 2008 and December 31, 2007 are
comprised of the following:





2008
            
            
            2007Deferred
      tax assetsDeferred
      deduction on stock-based Compensation expense
            
            $
            427,000
            
            
            $
            249,000Net
      operating loss carryover
            
            
            6,239,000
            
            
            
            4,053,000Total
      deferred tax asset
            
            
            6,666,000
            
            
            
            4,302,000Deferred
      tax liabilitiesExcess
      of U.S. tax deductions over book amounts written off
            
            
            3,824,000
            
            
            
            2,154,000Net
      deferred tax asset before valuation allowance
            
            
            2,842,000
            
            
            
            2,148,000Less
      valuation allowance for net deferred tax asset
            
            
            (2,842,000
            )
            
            
            (2,148,000
            )Net
      deferred tax asset
            
            $
            -
            
            
            $
            -Canadian
      deferred tax liability resulting fromflow-through
      share expenditures renounced
            
            $
            52,000
            
            
            $
            57,000





FASB
Interpretation No. 48, “Accounting for Uncertainty in Income taxes – an
interpretation of FASB Statement No. 109 (FIN 48). In July 2006, the FASB issued
FIN 48, which provides guidance on accounting for income tax positions about
which the Company has concluded there is a level of uncertainty with respect to
the recognition of a tax benefit in the Company’s financial statements. Tax
positions are defined very broadly and include not only tax deductions and
credits but also decisions not to file in a particular jurisdiction, as well as
the taxability of certain transactions. FIN 48 prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax return.
For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. There was not a material
impact on the Company’s consolidated financial position and results of
operations as a result of the adoption of the provisions of FIN 48. At September
30, 2008, the Company had no significant unrecognized tax positions and the
Company does not believe there will be any material changes in its unrecognized
tax positions over the next twelve months.





The
Company’s tax positions are subject to examination by tax authorities. As of
September 30, 2008, the Company’s tax years 2005 to present are open for United
States – Federal and State jurisdictions and Canada – Federal and Provincial
jurisdictions.




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 13





10.  SHARE
CAPITAL AND ADDITIONAL PAID IN CAPITAL





Authorized:




September
30, 2008 and December 31, 2007 – 300,000,000 common shares at $0.001 par
value





The
following share capital transactions occurred during the periods:




Issued
              
              Number
              
              
              Par
      Value
              
              
              Additional
      Paid in CapitalBalance
      December 31, 2007
              
              
              106,692,498
              
              
              $
              106,692
              
              
              $
              39,143,392Share
      Issue Costs (a)
              
              
              -
              
              
              
              -
              
              
              
              (9,595
              )Private
      Placement, net of costs (b)
              
              
              1,204,000
              
              
              
              1,204
              
              
              
              2,846,005Warrant
      converted to common shares (c)
              
              
              127,500
              
              
              
              128
              
              
              
              191,122Issue
      of Shares to Thunder (d)
              
              
              2,000,000
              
              
              
              2,000
              
              
              
              4,078,000Stock-based
      compensation (Note 11)
              
              
              -
              
              
              
              -
              
              
              
              507,790Balance
      September 30, 2008
              
              
              110,023,998
              
              
              $
              110,024
              
              
              $
              46,756,714





(a)
            During
      the nine months ended September 30, 2008, the Company paid $9,595 in share
      issue costs which related to common shares issued in
  2007.





(b)
            On
      June 18, 2008, the Company closed a private placement for an aggregate of
      1,204,000 units at a price of US$2.50 per unit, for gross proceeds of
      $3,010,000 and share issue costs aggregating $154,066 and net proceeds of
      $2,846,005. Each unit consisted of one common share and one warrant which
      entitles the holder to purchase, until June 18, 2010, one common share of
      the Company at a price per share of $3.50. In connection with 1,200,000
      shares of this private placement, an agent was granted warrants to
      purchase, until June 18, 2010, 96,000 common shares of the Company at
      $3.50 per common share.





(c)
            In
      June, 2008, warrant holders converted 127,500 warrants into 127,500 common
      shares at $1.50 per share for total proceeds of
  $191,250.





(d)
            In
      July, 2008, the Company issued 2,000,000 common shares to Thunder River
      Energy Inc. (“Thunder”) pursuant to the Company’s commitment to issue to
      Thunder common shares of the Company upon the achievement of certain
      milestones in connection with properties acquired from Thunder in
      September, 2007. (See Note 13). Such shares were valued and issued at
      market value of $2.04 per share in July, 2008 and the value was added to
      the cost of the Company’s Canadian unproved
  properties.





As of
September 30, 2008, the following common shares were reserved for
issuance:


WeightedEquivalent
            
            Average
            
            OptionExercise
            
            Shares
            
            Years
      to
            
            SharesPrice
      ($)
            
            Outstanding
            
            Expiry
            
            VestedStock
      Options (see summary below)
            $1.28-$2.58
            
            1,696,666
            
            3.41
            
            568,334Warrants
      (see summary below)
            $1.50-$3.50
            
            6,123,014
            
            1.45
            
            -Thunder
      Acquisition (Note 13)
            
            
            9,000,000
            
            
            
            -Total
      Shares Reserved
            
            
            16,819,680
            
            
            
            -





Stock Option
Plan





The
Company has a stock option plan under which it may grant options to its
directors, officers, employees and consultants for up to a maximum of 10% of its
issued and outstanding common shares at market price at the date of grant for up
to a maximum term of five years. Options are exercisable equally over the first
three years of the term of the option.




Return to Table of Contents
 14





A summary
of options granted under the plan is as follows:


WeightedNumber
            
            
            AverageExpiry
            
            of
      Option
            
            
            Exercise
            
            
            TotalDate
            
            Shares
            
            
            Price
            
            
            ValueGranted
      to five directors and one officer Oct. 23, 2006
            Oct.
      23/11
            
            
            1,280,000
            
            
            $
            1.50
            
            
            $
            1,920,000Cancellation
      of one officer’s option
            
            
            
            (280,000
            )
            
            $
            1.50
            
            
            
            (420,000
            )Granted
      to an employee Dec. 1, 2006
            Dec.
      1/11
            
            
            125,000
            
            
            $
            1.28
            
            
            
            160,000Granted
      to an officer Jan. 3, 2007
            Jan.
      3/12
            
            
            280,000
            
            
            $
            1.29
            
            
            
            361,200Granted
      to three senior advisors Apr. 2, 2007
            Apr.
      12/12
            
            
            300,000
            
            
            $
            1.75
            
            
            
            525,000Granted
      to a consultant Dec. 1, 2007
            Dec.
      1/12
            
            
            100,000
            
            
            $
            2.58
            
            
            
            258,000Granted
      to an employee Mar. 24, 2008
            Mar.
      24/13
            
            
            25,000
            
            
            $
            1.86
            
            
            
            46,500Cancellation
      of two senior Advisors’ options
            
            
            
            (133,334
            )
            
            $
            1.75
            
            
            
            (233,333
            )Balance
      September 30, 2008
            
            
            
            1,696,666
            
            
            $
            1.54
            
            
            $
            2,617,367





Warrants





During
2006, 2007 and 2008, the Company, as part of certain private placement
financings, issued warrants that are exercisable in common shares of the
Company. A summary of such outstanding warrants follows:


Exercise
            
            Expiry
            
            EquivalentShares
            
            WeightedAverage
      YearsPrice
            
            Date
            
            Outstanding
            
            to
      ExpiryBalance
      December 31, 2006
            $2.70-$3.50
            
            June
      30/11
            
            1,130,000
            
            2.75Issued
      February 20, 2007
            $1.50
            
            Feb.
      20/09
            
            860,000
            
            .39Issued
      May 10, 2007
            $1.50
            
            May
      10/09
            
            2,447,900
            
            .61Issued
      September 28, 2007
            $2.50
            
            Mar.
      28/09
            
            220,480
            
            .49Issued
      September 28, 2007
            $3.00
            
            Mar.
      28/09
            
            149,334
            
            .49Issued
      October 3, 2007
            $3.00
            
            Apr.
      3/09
            
            26,800
            
            .50Issued
      October 30, 2007
            $2.50
            
            Apr.
      30/09
            
            80,000
            
            .58Issued
      October 30, 2007
            $3.00
            
            Apr.
      30/09
            
            4,000
            
            .58Issued
      November 1, 2007
            $2.50
            
            May
      1/09
            
            32,000
            
            .58Total
      Issued in 2007
            
            
            
            
            3,820,514Balance
      December 31, 2007
            
            
            
            
            4,950,514Issued
      June 18, 2008
            $3.50
            
            Jun.
      18/10
            
            1,300,000
            
            1.70Converted
      upon exercise (Note 10)
            $1.50
            
            May
      10/09
            
            (127,500)Balance
      September 30, 2008
            
            
            
            
            6,123,014
            
            1.20








11.  STOCK-BASED
COMPENSATION





In
accordance with Financial Accounting Standards Board (“FASB”) Statement No.
123R, the Company uses the Black-Scholes option pricing method to determine the
fair value of each stock option granted and the amount is recognized as
additional expense in the statement of earnings over the vesting period of the
option. The fair value of each option granted has been estimated using the
following average assumptions:





2008
            
            2007Risk
      free interest rate
            3.05%
            
            3.99%Expected
      holding period
            3
      years
            
            3
      yearsShare
      price volatility
            75%
            
            75%Estimated
      annual common share dividend
            -
            
            -





Return to Table of Contents
 15





For
options granted during the nine months ended September 30, 2008, the fair value
totaled $23,750 (December 31, 2007 - $ 1,166,000). The amount of share-based
compensation expense recorded during the nine months ended September 30, 2008 is
estimated to be $507,790 (December 31, 2007 – $643,934) and has been included in
General and Administrative Expense with a corresponding credit to Additional
Paid in Capital. The unvested value of options expiring during the quarter was
$359,534 leaving the balance of the fair value of the options to be expensed in
future periods of $693,363 (December 31, 2007 - $1,536,937) over a vesting
period of three years.








12.  NET
LOSS PER SHARE





A
reconciliation of the numerator and denominator of basic and diluted loss per
share is provided as follows:





Three
            
            
            Three
            
            
            Nine
            
            
            NineMonths
            
            
            Months
            
            
            Months
            
            
            MonthsEnded
            
            
            Ended
            
            
            Ended
            
            
            EndedSeptember
            
            
            September
            
            
            September
            
            
            September30,
    2008
            
            
            
            30, 2007
            
            
            
            30, 2008
            
            
            
            30,
    2007Numerator:Numerator
      for basic and diluted loss per shareNet
      Loss
            
            $
            (558,614
            )
            
            $
            (877,957
            )
            
            $
            (1,593,958
            )
            
            $
            (1,839,051
            )Denominator:Denominator
      for basic loss per shareWeighted
      average shares outstanding
            
            
            109,632,694
            
            
            
            93,663,368
            
            
            
            107,734,253
            
            
            
            92,380,591In
      the money stock options
            
            
            213,851
            
            
            
            922,311
            
            
            
            523,472
            
            
            
            776,162In
      the money warrants
            
            
            368,953
            
            
            
            1,763,788
            
            
            
            1,018,356
            
            
            
            968,930Contingent
      Thunder shares
            
            
            2,500,000
            
            
            
            146,739
            
            
            
            2,500,000
            
            
            
            49,451Denominator
      for diluted loss per shareWeighted
      average shares outstanding
            
            
            112,715,498
            
            
            
            96,496,206
            
            
            
            111,776,081
            
            
            
            94,195,133Basic
      and diluted loss per share
            
            $
            (0.005
            )
            
            $
            (0.009
            )
            
            $
            (0.015
            )
            
            $
            (0.020
            )





Of the
contingent shares related to the property acquisition described in note 13, only
2.5 million shares of the 11 million total contingent shares are assumed to be
issued for purposes of the diluted loss per share calculations. The 6.5 million
shares relating to the significant discovery and production milestones have been
excluded because their inclusion would be anti-dilutive.








13.  COMMITMENTS
AND CONTINGENCIES





Thunder Acquisition
Commitments





On
September 28, 2007 the Company purchased from Thunder River Energy, Inc.
(“Thunder”) certain properties in Canada (Exploration License 413 – “EL 413”)
and the United States in consideration for cash and common shares of the
Company. Under the terms of the purchase agreement and an amendment dated
October 22, 2008 to the purchase agreement, the Company is committed to issue up
to 9 million additional common shares of the Company upon the achievement of
certain milestones in connection with the acquired properties, including 4
million shares to be issued as follows: 1 million shares upon the spudding of a
shallow depth well (1,500 meters TD) by June 30, 2010; 1.5 million shares upon
the spudding of a medium depth well (2,500 meters TD) before license expiry and
1.5 million shares upon conversion of any part of EL 413 to a Significant
Discovery Lease. If, as a result of the Company’s exploration and development
activities on the acquired properties, reserves in place exceed 100 million
barrels, then, for each excess 10 million barrels in place, 100,000 additional
shares could be issued, up to a maximum of 5 million additional shares. An
extension to the license expiry date has been applied for and is expected to be
approved. The purchase agreement also included a commitment of the Company to
issue 2 million shares to Thunder upon the completion of a seismic program on
the property by June 30, 2008. Such seismic program was completed and in July,
2008, 2 million shares were issued to Thunder. (See Share Capital Note
10).




Return to Table of Contents
 16





Canadian Flow-through Share
Commitments





In
September and October, 2007, 2,251,670 private placement shares were issued at a
purchase price of $3.00 for gross proceeds of $6,755,010 and on the basis that
the Company would provide the investors a Canadian flow through tax deduction.
In order to provide such flow through share tax deduction benefits to the
investors, the Company committed to expend the proceeds on eligible capital
expenditures in Canada prior to December 31, 2008 and renounce such expenditures
to the flow through share investors. In 2008, these expenditures were renounced
effective December 31, 2007 and as of September 30, 2008, eligible expenditures
had been incurred in an amount sufficient to satisfy this
commitment.





Outstanding
Litigation





Brink
Transaction





On or
about June 18, 2008, the Company entered into a letter agreement (the “Letter
Agreement”) with Brink Energy Ltd. (“Brink”), a private Alberta oil and gas
corporation, with respect to a proposed Plan of Arrangement (the “Arrangement”),
in accordance with the Alberta Business Corporations Act, which provided for the
Company to acquire all of the outstanding shares of Brink (the “Transaction”).
Under the Arrangement, the holders of common shares of Brink (“Brink Shares”)
would have received for each Brink Share, at the election of the Brink
shareholder, either: (i) 0.411 of a common share of the Company, or (ii) $0.575
plus 0.2055 of a Company share, subject to an aggregate maximum amount of cash
paid to Brink shareholders of Cdn. $7 million. Assuming Brink shareholders had
elected to receive the $7 million maximum cash consideration, the balance of the
consideration for the Brink Shares would have been paid in common shares of the
Company. The Letter Agreement provided that a non-completion fee would be
payable by Brink to Kodiak, as liquidated damages, by way of a transfer of
Brink’s interest in certain lands in the event there was a breach or
non-performance by Brink of a material provision of the Letter
Agreement.





In
addition, in June, 2008, the Company loaned $980,681 (Cdn. $1 million) to Brink,
which loan was utilized by Brink to reduce its bank indebtedness. The loan to
Brink bears interest at prime plus 2%, is secured by Brink assets and was
subordinated to Brink’s bank indebtedness. The loan is also convertible into
common shares of Brink under certain circumstances.





In a
letter dated August 18, 2008, Brink’s counsel, on behalf of the Board of
Directors of Brink, advised the Company that it was not going to proceed with
the Transaction.  On September 12, 2008, the Company filed in the
Court of Queen’s Bench of Alberta, Judicial District of Calgary, a Statement of
Claim against Brink in which the Company is claiming, among other things,
repayment of its loan, including accrued interest thereon, and the transfer to
the Company of certain lands of Brink in satisfaction of Brink’s Non-completion
fee obligation arising out of Brink’s termination of the Transaction. On
September 29, 2008, Brink filed in the Court of Queen’s Bench of Alberta,
Judicial District of Calgary, a Statement of Defence in which Brink denies all
of the allegations in the Company’s Statement of Claim. At the same time, Brink
filed a Counterclaim in which Brink claims, among other things, that Kodiak
breached covenants of the Letter Agreement and that Kodiak is obligated to Brink
for a Non-completion fee of $1 million. On October 7, 2008, the Company filed a
Statement of Defence denying all of Brink’s allegations in its Counterclaim. The
parties are attempting to resolve this matter via negotiation of a
settlement.





Although
management of the Company believes that the loan and interest are recoverable
and that the Company is entitled to a non-completion fee, no assurance can be
given that the Company will be successful in recovering such loan and interest
and/or non-completion fee. The loan and interest are included in Accounts
receivable as at September 30, 2008 (See Accounts Receivable Note
4).





Return to Table of Contents
 17





14.  FINANCIAL
INSTRUMENTS





The
Company, as part of its operations, carries a number of financial instruments.
It is management’s opinion that the Company is not exposed to significant
interest, credit or currency risks arising from these financial instruments
except as otherwise disclosed.





The
Company’s financial instruments, including cash and short term deposits,
accounts receivable, accounts payable and accrued liabilities are carried at
values that approximate their fair values due to their relatively short maturity
periods.





15.  RELATED
PARTY TRANSACTIONS





For the
nine months ended September 30, 2008, the Company paid $ Nil (2007 - $78,103) to
Sicamous Oil & Gas Consultants Ltd., a company owned by the President and
Chief Executive Officer of the Company, for consulting services rendered. These
amounts were charged to General and Administrative Expense.





For the
nine months ended September 30, 2008, the Company paid $ Nil (2007 - $40,851) to
MHC Corp., a company owned by the former Chief Executive Officer of the Company
for consulting services rendered by him. These amounts were charged to General
and Administrative Expense.





For the
nine months ended September 30, 2008, the Company paid $88,435 (2007 – $55,928),
including $ 9,583 owing as at September 30, 2008 (December 31, 2007 - $ Nil) to
Harbour Oilfield Consulting Ltd., a company owned by the Vice-President
Operations of the Company for consulting services rendered by him. Of this
amount, $39,394 (2007 - $ Nil) was capitalized to Unproved Oil and Gas
Properties and $49,041 (2007 - $ 55,928) was charged to General and
Administrative Expense.





For the
nine months ended September 30, 2008, the Company paid $143,426 (2007 -
$91,310), including $ 6,043 owing as at September 30, 2008 (December 31, 2007 -
$ Nil) to the Chief Financial Officer of the Company for services rendered by
him. These amounts were charged to General and Administrative
Expense.





These
related party transactions were in the normal course of business and agreed to
by the related parties and the Company based on negotiations and Board approval
and accordingly had been measured at the exchange amounts.





As at
September 30, 2008 and December 31, 2007, no other amounts were owing to any
related parties.








16.  SEGMENTED
INFORMATION





The
      Company’s geographical segmented information is as
  follows:





Three Months Ended Sept.
      30, 2008
            
            
            Nine Months Ended Sept. 30,
      2008U.
S.
            
            
            Canada
            
            
            Total
            
            
            U.
S.
            
            
            Canada
            
            
            TotalIncome
      during theEvaluation Period
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            46
            
            
            $
            46Net
      Income (Loss)
            
            
            (6,300
            )
            
            
            (552,313
            )
            
            
            (558,613
            )
            
            
            14,540
            
            
            
            (1,608,497
            )
            
            
            (1,593,957
            )Capital
      Assets
            
            
            10,340,716
            
            
            
            28,007,558
            
            
            
            38,348,274
            
            
            
            10,340,716
            
            
            
            28,007,558
            
            
            
            38,348,274Total
      Assets
            
            
            10,346,538
            
            
            
            29,491,343
            
            
            
            39,837,881
            
            
            
            10,346,538
            
            
            
            29,491,343
            
            
            
            39,837,881Capital
      Expenditures
            
            
            94,721
            
            
            
            4,652,371
            
            
            
            4,747,092
            
            
            
            3,261,471
            
            
            
            11,022,796
            
            
            
            14,284,267Three Months Ended Sept. 30,
      2007
            
            
            Nine Months Ended Sept. 30,
      2007U.
S.
            
            
            Canada
            
            
            Total
            
            
            U.
S.
            
            
            Canada
            
            
            TotalIncome
      during theEvaluation Period
            
            $
            -
            
            
            $
            (202
            )
            
            $
            (202
            )
            
            $
            -
            
            
            $
            225
            
            
            $
            225Net
      Loss
            
            
            18,007
            
            
            
            859,950
            
            
            
            877,957
            
            
            
            30,563
            
            
            
            1,808,488
            
            
            
            1,839,051Capital
      Assets
            
            
            6,642,258
            
            
            
            15,933,076
            
            
            
            22,575,336
            
            
            
            6,642,258
            
            
            
            15,933,078
            
            
            
            22,575,336Total
      Assets
            
            
            6,731,635
            
            
            
            24,757,950
            
            
            
            31,489,585
            
            
            
            6,731,635
            
            
            
            24,757,950
            
            
            
            31,489,585Capital
      Expenditures
            
            
            6,052,373
            
            
            
            8,979,643
            
            
            
            15,032,016
            
            
            
            6,077,423
            
            
            
            15,170,182
            
            
            
            21,247,605








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 18





17.  CHANGES
IN NON-CASH WORKING CAPITAL




CumulativeSinceThree
              
              
              Three
              
              
              Nine
              
              
              Nine
              
              
              InceptionMonths
              
              
              Months
              
              
              Months
              
              
              Months
              
              
              April
      7,Ended
              
              
              Ended
              
              
              Ended
              
              
              Ended
              
              
              2004
      toSept.
      30,
              
              
              Sept.
      30,
              
              
              Sept.
      30,
              
              
              Sept.
      30,
              
              
              Sept.
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              2008Operating
      Activities:Accounts
      Receivable
              
              $
              (5,314
              )
              
              $
              18,973
              
              
              $
              623,448
              
              
              $
              (42,256
              )
              
              $
              (60,238
              )Prepaid
      Expenses and Deposits
              
              
              18,426
              
              
              
              7,004
              
              
              
              2,573
              
              
              
              (30,272
              )
              
              
              (94,935
              )Accounts
      Payable
              
              
              209,446
              
              
              
              1,749
              
              
              
              263,807
              
              
              
              8,899
              
              
              
              388,683Accrued
      Liabilities
              
              
              (2,661
              )
              
              
              8,893
              
              
              
              (53,594
              )
              
              
              (30,894
              )
              
              
              48,401Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              25,000Total
              
              $
              219,897
              
              
              $
              36,619
              
              
              $
              836,234
              
              
              $
              (94,523
              )
              
              $
              306,911Investing
      Activities:The
      total changes in investing activities non-cash working capital accounts
      detailed below pertains to capital asset additions and has been included
      in that caption in the Statement of Cash Flow:Accounts
      Receivable
              
              $
              174,504
              
              
              $
              (797,192
              )
              
              $
              (419,623
              )
              
              $
              (579,697
              )
              
              $
              (950,190
              )Prepaid
      Expenses and Deposits
              
              
              12,818
              
              
              
              186,748
              
              
              
              (3,995
              )
              
              
              153,117
              
              
              
              13,038Accounts
      Payable
              
              
              114,525
              
              
              
              (167,937
              )
              
              
              (306,558
              )
              
              
              786,913
              
              
              
              1,002,372Accrued
      Liabilities
              
              
              (51,615
              )
              
              
              (365,693
              )
              
              
              (339,661
              )
              
              
              (184,181
              )
              
              
              93,627Total
              
              $
              250,232
              
              
              $
              (1,144,074
              )
              
              $
              (1,069,837
              )
              
              $
              176,152
              
              
              $
              158,847Financing
      Activities:The
      total changes in financing activities non-cash working capital accounts
      detailed below pertains to shares issued and issuable and has been
      included in that caption in the Statement of Cash Flow:Accounts
      Receivable
              
              $
              180,000
              
              
              $
              (2,121
              )
              
              $
              -
              
              
              $
              (2,121
              )
              
              $
              -Prepaid
      Expenses and Deposits
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (10,000
              )Accounts
      Payable
              
              
              -
              
              
              
              11,034
              
              
              
              (113,468
              )
              
              
              (17,815
              )
              
              
              -Accrued
      Liabilities
              
              
              (250,000
              )
              
              
              111,908
              
              
              
              (220,000
              )
              
              
              331,908
              
              
              
              -Convertible
      Debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              (
      70,000
              )
              
              $
              120,821
              
              
              $
              (333,468
              )
              
              $
              311,972
              
              
              $
              (10,000
              )








Return to Table of Contents
 19




ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS





Forward
Looking Statements





From time
to time, we or our representatives have made or may make forward-looking
statements, orally or in writing. Such forward-looking statements may be
included in, but not limited to, press releases, oral statements made with the
approval of an authorized executive officer or in various filings made by us
with the Securities and Exchange Commission, including this Form 10-Q. Words or
phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project or projected", or similar expressions are
intended to identify "forward-looking statements". Such statements are qualified
in their entirety by reference to and are accompanied by the above discussion of
certain important factors that could cause actual results to differ materially
from such forward-looking statements.





Investors
should be aware of factors that could have a negative impact on the Company's
prospects and the consistency of progress in the areas of revenue generation,
liquidity, and generation of capital resources. These include: (i) inability of
the Company to generate revenue and profit from its properties, (ii) possible
inability to attract investors for its equity securities or otherwise raise
adequate funds from any source should the Company seek to do so, (iii) increased
governmental regulation, (iv) increased competition, (v) unfavorable outcomes to
litigation involving the Company or to which the Company may become a party in
the future and, (vi) a very competitive and rapidly changing operating
environment. The risks identified here are not all inclusive. New risk factors
emerge from time to time and it is not possible for management to predict all of
such risk factors, nor can it assess the impact of all such risk factors on the
Company's business or the extent to which any factor or combination of factors
may cause actual results to differ materially from those contained in any
forward-looking statements. Accordingly, forward-looking statements should not
be relied upon as a prediction of actual results.





The
financial information set forth in the following discussion should be read in
conjunction with management’s discussion and analysis contained in our 2007
Annual Report on Form 10-K as well as the consolidated financial statements and
notes thereto included elsewhere herein.





Plan of
Operation





During
the first nine months of 2008, the Company has been active with substantial
development on each of our three major properties. During the next twelve
months, the Company plans to continue the development of its asset base as well
as identify additional assets for addition to our overall land
base.





All
projects to date have been managed on schedule and within budget as the Company
proves to be an effective operator in each jurisdiction in which it operates. In
late 2007, a $17.4 million private placement financing was completed under
difficult market conditions and in December 2007, the Company’s common shares
were listed on the Toronto Venture Exchange in Canada on an aggressive timeline.
The Company expects to finance its future capital expenditure programs with
either debt or equity financings and divestitures or a combination thereof. As
of September 30, 2008, the Company has no secured debt. A description of the
Company’s recent and planned activities for its core properties is included
below.





Kodiak
Energy, Inc. is a petroleum and natural gas exploration and development company
whose primary objective is to identify, acquire and develop working interests in
undeveloped or underdeveloped petroleum and natural gas prospects. We are
focused on prospects located in Canada and the United States. The prospects we
hold are generally under long term leases and include partial and full working
interests. In all of our core properties, Kodiak is the operator and majority
interest owner. In two properties, we have the option to perform certain
exploratory drilling to earn additional interests. The prospects are subject to
varying royalties due to the state, province or federal governments and, in some
instances, to other royalty owners in the prospect. None of our core properties
are exposed to the recent Alberta Royalty Review changes.








Return to Table of Contents
 20





The
Company plans to engage in seismic data collection and well drilling programs on
a number of prospects in which it has an interest or right to acquire percentage
interests over the next two years. Drilling programs will be conducted where the
seismic data supports the effort and expense and further development drilling
will be based on the results of the initial wells. A number of our prospects are
located in the vicinity of petroleum and natural gas infrastructure, thereby
providing the opportunity to tie-in to existing or planned pipelines. This will
be important in lowering the overall cost of development and marketing any
natural resources located in a prospect.





The
Company currently has no petroleum or natural gas reserves or production. The
Company will begin recording revenue when production from proved reserves
commences.





Core
Properties





Canada





Lucy –
Northern British Columbia





The
Company is the operator and 80% working interest owner of a 1,920 acre lease
located in Northeastern British Columbia. The Company believes the lease is
situated on the southeast edge of the Horn River Basin and the Muskwa Shale gas
prospect. Industry continues to show increased interest in this shale gas play
with several comparisons of the Muskwa Shale gas potential as an analogue of the
Barnett Shale gas potential. Other industry participants continue to acquire
large land positions in this part of British Columbia which are prospective for
this type of play.




The
Company has been involved in two previous drilling operations on the lease. In
the fourth quarter of 2006, Kodiak farmed in as a non-operated partner, paying
10% to earn 7.5%, on a drilling operation in the Lucy (Gunnell) area. This first
drilling operation, designed to target a Middle Devonian reef prospect, had
several operational problems and was unsuccessful.





After
performing an internal review of seismic and drilling data, it was determined
there was a seismic anomaly on the southern half of the lease. This anomaly was
identified on several different seismic lines and a decision was made to drill a
well on that part of the lease to evaluate both the anomaly as the primary
target and the Muskwa shale, seen in the first well but not evaluated by the
operator at that time.





In the
third quarter of 2007, the Company served partners with an independent
operations notice with the intention of increasing its working interest in the
lease. The Company was able to increase its working interest to 80%; however,
that process required a substantial amount of title work, which was recently
completed.





In the
first quarter of 2008, a second drilling operation was completed and a vertical
well was cased. It was determined that the Middle Devonian seismic anomaly was
not a reef buildup and the wellbore was cased due to encountering significant
gas shows in the previously identified Muskwa Shale with a formation thickness
of approximately sixty meters.





The
Company submitted an application to the British Columbia Oil & Gas
Commission (“OGC”) for an experimental scheme to test the Muskwa Shale gas
potential. On August 12, 2008, Kodiak received the final approval of the Lucy
experimental scheme application. The Company is preparing to execute a
multi-phase work program designed to test the deliverability of the Muskwa shale
gas formation using vertical and horizontal drilling and completion techniques.
Kodiak’s proposed work program would allow for early production into a pipeline
in order to monitor long term deliverability rates and pressures of horizontal
and vertical test wells on the periphery of the Horn River Basin.





These
results would be some of the first commercial production results for a Horn
River Basin shale gas project and would provide information that would help
define the effective exploration area of the Basin and assist in the validation
of adjoining properties in a divestiture process, should that
occur.








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 21





Kodiak
contracted an industry-recognized shale gas assessment laboratory to prepare and
analyze the drill cuttings from the 2008 well in order to evaluate the Muskwa
Shale interval for gas potential. The shale gas assessment is conducted by
performing various tests on the rock cuttings that were obtained while drilling
the well in order to determine the type, quality and amount of adsorbed gas and
free gas.





The most
important conclusion from the drill cutting analysis is that the information
received continues to support the evaluation of Kodiak’s Muskwa (Evie) shale gas
prospect. The laboratory data is consistent with other public industry and
government data on the Muskwa shales. It should also be noted that the numbers
obtained on the laboratory analysis of drill cuttings may be conservative due to
the nature of sampling drill cuttings on a drilling rig. Another significant
point is that all three wells on the Kodiak lease drilled deep enough to
penetrate the Muskwa Shale had elevated gas detector readings while penetrating
the shales.





The
prospect is still in the early stages of delineation and no assurance can be
given that its exploitation will be successful. However, based on well cuttings
and drilling data, Kodiak’s internal technical analysis has estimated the volume
of adsorbed and free gas in the Muskwa (Evie) shales to have a potential net
reserves of 41 bcf per section or 123 bcf total. We estimate, based on estimated
25% recovery factor on the three sections of land, a total of 30.75 bcf
recoverable contingent resources. In calculating this number, the Company used
all of the laboratory analysis findings and wellbore information obtained during
the drilling operation. For reference, this internally calculated volume is
between the “best” and “high” calculations listed in the Chapman report that
only had the TOC analysis and industry available data. Further appraisal work is
required before these estimates can be finalized and establish
commerciality.





The
current intention is to perform the following work commitments for the license
(target dates are subject to change as new information becomes
available).





·
            Fourth
      Quarter 2008 and First Quarter 2009 - Perforate the Muskwa intervals,
      perform a vertical fracture treatment, test and evaluate pressures and
      production and, if economic, equip and tie in well to
      pipeline.





·
            Third
      Quarter 2009 – Drill and case a 1000 meter horizontal leg from an existing
      cased vertical well on the lease, perform a horizontal staged fracture
      treatment, test and evaluate pressures and production and, if economic,
      equip and tie in well to pipeline.





Little
Chicago – Northwest Territories




The
Company is the operator and largest working interest owner of the 201,160
acre Exploration Licence 413 (“EL 413”)in the Mackenzie River Valley
centered along the planned Mackenzie Valley Pipeline. In 2006, the Company
signed an exploration farm-in agreement with the two 50% working interest owners
of EL 413. The company reprocessed 50 km of existing seismic data in Q4 of
2006 and during the 2006-07 winter work season, the Company expended
approximately $6,500,000 to shoot and acquire 84 km of high resolution 2D
seismic data on the farm-out Lands, thus earning a 12.5% working interest in the
property. In September, 2007, the Company acquired Thunder River Energy, Inc.’s
(“Thunder”) remaining 43.75% in the property giving the Company a 56.25%
interest in EL 413. A letter of intent signed earlier in 2008 with the Company’s
remaining partner in the project, that would have allowed Kodiak to acquire the
balance of the working interest in EL 413 and become a 100% working interest
owner, recently expired.





A 2007-08
43 km 2D high resolution seismic program has been completed on the property and
results are being processed and interpreted. This project was completed on
budget and schedule for a total cost of $4.5 million. The initial seismic
results show substantial structural closure and support the planning for a
2008-09 multiple well drilling program. That data was included in an updated
Chapman Prospective Resource report published in May, 2008.




EL 413
(Little Chicago) has two prospective target reservoirs identified by the 2007
and  2008 seismic and gravity surveys, plus a further deeper target,
yet to be qualified or quantified.  While reviewing core samples and
well information from previous regional drilling operations, Kodiak also
identified a shallow oil reservoir which is an additional prospective
target.








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 22





The
Devonian Bear Rock Prospect (“Bear Rock”) is the first described target and is
located at a shallow depth of approximately 700 meters (2,300 ft.). This
reservoir was previously identified and preliminarily evaluated in the initial
Chapman Report prepared in 2005. The expected product from the reservoir is
light and medium oil, with no consideration to solution gas.





The
combined seismic obtained during 2007 and 2008 acknowledged a series of pools
distributed throughout the project. The Chapman Report identified fifteen Bear
Rock leads located along the seismic lines with five of them being selected as
well defined high grade Bear Rock leads. This is an increase of 5 additional
leads from the initial 2007 work program. Indicators of these potentially
prolific reservoirs are present along several seismic lines that may imply these
Bear Rock occurrences to be present throughout EL 413.





The 2007
seismic also identified a pinchout at the top of the Precambrian formation that
overlies the pinchout of the Basal Sand to suggest a hydrocarbon trap. The two
overlying pinchouts present an opportunity for both prospects to be
explored. Additional geophysical work was required to target optimum drilling
locations.





The
decision to acquire additional seismic in the winter of 2008 was made to
accommodate the potential to drill both the Devonian Bear Rock and the Basal
Cambrian Sand targets from a common drilling site. This would substantially
lower drilling costs on a per well basis and reduce the overall project
risk.





The
addition of 2008 seismic to the 2007 seismic further defined a hydrocarbon trap
in the Basal Cambrian Sand sitting on the top of the PreCambrian. This interval,
found at a depth of approximately 2,300 meters (7,545 feet), has never been
regionally penetrated and tested; however, it has been proven as a productive
reservoir in the Colville Hills area approximately 125 kilometers (77 miles)
east of EL 413.  With this additional data, the Chapman Report
identified five drilling locations that will allow the Basal Cambrian Sand and
the top of the Precambrian to be drilled and tested.





Physical
evidence of hydrocarbons is present with a natural surface oil seep on the
northern edge of the license area on the banks of the Mackenzie River. This
natural occurrence is suggestive of a shallow oil pool, possibly in the Canol
formation, and warrants further investigation. While reviewing core samples and
well logs from previous regional drilling activity. Kodiak was able to map out
the Canol/Imperial formation and determine that it is the likely source of the
natural surface seeps. This prospect will be found on the Northwest quarter of
EL 413 and is at a very shallow depth of approximately 350 meters (1,148
feet).





Internal
company review has prioritized the drill locations to two high grade locations
that will provide the opportunity to test the Devonian Bear Rock Prospect and
the Basal Cambrian Sand/Precambrian Prospect with the same drill
site.





It is
anticipated that the first two exploratory wells will be drilled during the 2009
drilling season. Work has commenced on preparing the necessary permitting
applications and the Company is currently working on finalizing the Access and
Benefits agreements with the beneficiaries of the land claims – the Gwich’in and
Sahtu.  These agreements are expected to be finalized in the near
future; however, delays in obtaining these agreements and other permits required
for the drilling program have made it difficult to mobilize for the winter of
2008/09 and mobilization is now scheduled for the following season. Part of
those negotiations would be a post drilling royalty earning into the property by
the Gwich’in and Sahtu when converted to a significant discovery
license.





In
addition, Kodiak has made application with regulators to extend the EL 413
license, approval of which Kodiak believes is imminent. This extension will
permit an expanded development plan to investigate additional targets identified
in the previous seismic programs.





The
Company is currently in discussions with other industry partners to share in the
costs of the drilling programs, thus reducing risk and capital commitments.
Financing plans will be finalized when overall partnerships are established.
Kodiak intends on retaining operatorship.





The
Company has demonstrated that it is an effective operator in this challenging
environment – with on budget, on schedule projects over the last two winters,
excellent relationships with all stakeholders from the Beneficiaries of the Land
Claims, to all the regulatory bodies and project contractors in the
area.


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 23





United
States




New
Mexico




Through
its acquisition of Thunder, the Company acquired a 100% interest in 55,000 acres
of property located in northeast New Mexico. Additional land acquisitions have
increased the Company’s land position to approximately 79,000 acres. These lands
have potential for natural gas and CO2 and oil and helium resources at shallow
depths.




The
Company recently completed a 35 mile 2D high resolution seismic program and a
three well drilling program. The three wells were drilled with air to reduce
formation damage and they were cased to the base of the Yeso formation. Based on
gas detector results, drill cutting samples and open hole logs, all wells showed
three potential shallow porous sandstone formations capable of CO2 production
with up to 200 feet of identified net pay thickness. The Yeso, Glorieta and
Santa Rosa formations were perforated and flow tested to determine
deliverability and pressure. There were multiple gas samples analyzed at
specialized independent laboratories from two separate extended flow tests that
identified CO2 concentration quality from 98.4% to 99.5%. Two of the wells were
stimulated with a nitrified acid squeeze and were able to sustain an extended
flow rate of approximately 375mcf/d. The shallow sands have been mapped using
offset well control and the newly acquired seismic data and the Company has
determined there is a high likelihood of encountering the target formations
throughout the leased project area; provided, however, that no assurance can be
given that this will be the case.





The 35
mile 2D high resolution seismic program was completed on schedule and on budget
and after reviewing the seismic data, the Company was able to effectively map
out a probable long term development area which would result in CO2 production
from the previously identified formations. The seismic is currently being
evaluated to identify possible conventional oil and gas prospects on the leased
project area.





A
preliminary project feasibility study is being commissioned to identify capital
development costs and timelines as well as projected operating costs in order to
provide information to support a large scale long-term plan of
development.  This information will enable the definitions for pipeline
access planning and negotiation, transportation agreements, sales contracts for
the CO2, additional land acquisition terms and conditions, facility engineering
and construction and ultimately the parameters for financing the project
development.




Several
companies have expressed interest in participating in the New Mexico properties
at several levels of involvement. There is also potential for the
integration of the CO2 production into Permian Basin enhanced oil recovery
projects.




Montana




During
2006, the Company, under a joint venture farmout agreement, participated in a
seismic acquisition program and a two well drilling program to earn a 50%
non-operating working interest in the wells and well spacing. This joint venture
project provides the company with the right to participate on a 50% basis going
forward on this prospect in the Hill County area of Montana. The Operator
of the project had 60,000 contiguous undeveloped acres of P&NG rights in the
area, as well as some excess capacity in facilities and pipelines. Two wells
were drilled in the third quarter of 2006; one is cased for subsequent
evaluation of the multiple zones found and one was abandoned. In order to
facilitate the efficient exploration of this prospect area, the company has
acquired from the original operator a 100% working interest of 12,000 acres of
P&NG rights while retaining the right to participate and initiate operations
on the remaining approximate 48,000 acres of prospect leases. After an internal
geological review of this prospect, and in light of current commodity prices,
consideration is being given to the divestiture of the property and the company
is working jointly with our partner to obtain the best value.








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 24





Financial
Condition and Changes in Financial Condition


(All
dollar values are expressed in United States dollars unless otherwise
stated)





During
the first nine months of 2008, the Company continued to further its major
projects in Canada and the United States. Capital expenditures were incurred
during the three and nine months ended September 30, 2008 of $4,747,092 (2007 -
$15,032,016) and $14,284,267 (2007 - $21,247,605) respectively. The Company’s
total assets have increased to $39,837,881 as at September 30, 2008 from
$34,690,768 at the end of 2007 and just $2,707,075 at the end of 2006. These
increases resulted from the aggressive capital expenditure programs undertaken
by the Company over the last two years and were enabled by the financings
described under “Liquidity and Capital Resources”. Total assets consist of cash
and other current assets of $1,157,182 (December 31, 2007 - $10,288,410);
unproved oil and gas properties and equipment of $38,348,274 (December 31, 2007
- $24,043,005); and other assets of $332,425 (December 31, 2007 - $359,353). Our
total current liabilities were $1,533,081 (December 31, 2007 - $2,302,555) and
consisted of accounts payable and accrued liabilities relating to capital
activities and general and administrative costs incurred. We had long term
liabilities of $44,937 (December 31, 2007 - $110,955) and asset retirement
obligations of $210,764 (December 31, 2007 - $151,814). Shareholders’ equity
amounted to $37,997,099 (December 31, 2007 - $32,068,444), net of an accumulated
deficit of $8,433,397 (December 31, 2007 - $6,839,439).





Overall
Operating Results





In the
nine months ended September 30, 2008, the Company had income during the
evaluation period of $ 46 (2007 - $225) and operating costs of $8,863 (2007 -
$12,149) relating to  2006 production from its Granlea, Alberta
project. The well watered out in late 2006 and was deemed uneconomic. Except for
that production, the Company remains in the exploration stage.





In the
three months ended September 30, 2008, the Company had income during the
evaluation period of $ Nil (2007 – Loss of $202) and operating costs
of $3,590 (2007 - $549) relating to Granlea.





Net Loss
for the nine months ended September 30, 2008 totalled $1,593,958 (2007 –
$1,839,051). As well as the operating expenses referred to above, expenses
during the period consist of general and administrative expenses of $1,620,905
(2007 - $1,647,925), including stock-based compensation expense amounting to
$507,790 (2007 - $469,322); depletion, depreciation and accretion of $ 41,718
(2007 - $35,043) and interest expense of $1,257 (2007 - $94,056).





Net Loss
for the three months ended September 30, 2008 totalled $558,614 (2007 –
$877,957). As well as the operating expenses noted above, expenses during the
period consist of general and administrative expenses of $550,822 (2007 -
$793,936), including stock-based compensation expense amounting to $152,185
(2007 - $190,239); depletion, depreciation and accretion of $16,441 (2007 -
$12,900) and interest expense of $ Nil (2007 - $75,238).





General
and administrative expenses include the cost of employed and consulting
personnel and others who provided investor relations services, public company
costs for SEC reporting compliance, accounting, audit and legal fees and other
general and administrative office expenses. General and administrative expense
also includes stock-based compensation relating to the cost of stock options
granted to directors, officers, employees and other personnel. Although
General and Administrative costs for the three and nine month periods ending
September 30, 2008 and 2007 are comparable, such costs have been increasing as
the scope of the company’s activities have increased and we believe substantial
amounts will continue to be spent on such costs in the near term as we progress
with the  evaluation of our oil and gas prospects. A significant
increase in our shareholder base from 1,000 to approximately 7,000 shareholders
over the past two years has also contributed to our increased general and
administrative costs.





Depletion,
depreciation and accretion for the three and nine months ended September
30, 2008 and 2007 includes the cost of depreciation relating to office
furniture and equipment. All of the remaining capitalized costs relate to
Canadian and United States unproven properties and have been excluded from the
depletable cost pools for ceiling test purposes.





The
deferred income tax provisions (recoveries) for the three months ended September
30, 2008 were $ Nil (2007 - $(3,468)) and for the nine months ended September
30, 2008 were $(5,000) (2007 – $52,012). (See Note 9).








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 25





Capital
Expenditures:





Capital
Expenditures incurred by the Company during the three and nine months ended
September 30, 2008 and 2007 are set out below.




Three
      Months
            
            
            Nine
      MonthsEnded Sept.
      30
            
            
            Ended Sept. 302008
            
            
            2007
            
            
            2008
            
            
            2007Land
      acquisition and carrying costs
            
            $
            4,260,154
            
            
            $
            14,563,699
            
            
            $
            5,432,404
            
            
            $
            14,591,140Geological
      and geophysical
            
            
            274,709
            
            
            
            224,230
            
            
            
            4,827,544
            
            
            
            6,105,000Intangible
      drilling and completion
            
            
            166,306
            
            
            
            237,751
            
            
            
            3,862,901
            
            
            
            492,189Tangible
      completion and facilities
            
            
            45,923
            
            
            
            6,336
            
            
            
            161,418
            
            
            
            59,276Total
      Capital Costs Incurred
            
            $
            4,747,092
            
            
            $
            15,032,016
            
            
            $
            14,284,267
            
            
            $
            21,247,605





Land
acquisition and retention costs include the cost of new acreage acquired in New
Mexico, additional consideration paid for our EL413 NWT property and ongoing
property retention costs.





Geological
and geophysical costs include the costs of the seismic programs carried out on
the EL 413 Little Chicago, North West Territory project in 2008 and 2007 and the
New Mexico seismic program for 2008.





Intangible
drilling and completion costs for 2008 include the Company’s 57% share of the
drilling of the recent Lucy well in British Columbia and 100% of the three well
New Mexico program.





Liquidity
and Capital Resources:





From
inception to September 30, 2008, the Company’s operations have been financed
from the sale of securities and loans from shareholders. As at September 30,
2008, the Company had a working capital deficiency of $375,899 compared to
working capital at December 31, 2007 of $7,985,855. The Company’s cash
position has decreased from $737,599 as of December 31, 2007 to $54,857 as of
September 30, 2008 and from $7,413,387 as of September 30, 2007. Cash on hand as
of September 30, 2007 was expended in the fourth quarter of 2007 and the first
half of 2008 on the Company’s capital expenditure programs and general and
administrative costs incurred in those periods. During the second quarter of
2008, the Company raised $2,846,005, net of share issue costs, in private
placement financing proceeds. This financing has enabled the Company to fund its
on-going 2008 capital expenditures and general and administrative expenses. The
Corporation currently has no long term secured debt obligations.





The
Company is continuing to seek additional financing, either through equity and
debt financing or property divestitures or a combination thereof to cover the
estimated cost of its planned programs for the balance of 2008 and into 2009.
The global economic downturn and financial uncertainty in the credit and capital
markets is making the raising of such capital very challenging. There is no
assurance that the Company will be able to access financing or divest of
property to carry out our capital programs in the near or extended
term.





Should
the Company elect to raise additional capital through the issuance and sale of
equity securities, the sales may be at prices below the market price of our
stock, and our shareholders may suffer significant dilution.





There is
uncertainty that the Company will continue as a going concern, which presumes
the realization of assets and discharge of liabilities in the normal course of
business for the foreseeable future. The Company has not generated positive cash
flow since inception and has incurred operating losses and will need additional
working capital for its future planned activities. These conditions raise doubt
about the Company’s ability to continue as a going concern. Continuation of the
Company as a going concern is dependent upon obtaining sufficient working
capital to finance ongoing operations. The Company’s strategy to address this
uncertainty, includes additional equity and debt financing and some
divestitures; however, there are no assurances that any such financings or
divestitures can be completed on favorable terms, if at all, or that the Company
will generate positive cash flow. These financial statements do not reflect the
adjustments or reclassification of assets and liabilities that would be
necessary if the Company were unable to continue its operations.





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 26





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





The
Company is exposed to market risk from changes in petroleum and natural gas and
related hydrocarbon prices, foreign currency exchange rates and interest
rates.





Petroleum
and Natural gas and Related Hydrocarbon Prices





The
Company currently has no petroleum and natural gas and related hydrocarbon
reserves or production so the Company therefore has no current exposure related
to the instability of prices of such commodities. However, the prices of these
commodities are unstable and are subject to fluctuation, due to factors outside
of the Company’s control, including war, weather, the availability of alternate
fuel and transportation interruption and any material decline in these commodity
prices could have an adverse impact on the economic viability of the Company’s
exploration projects.





Foreign
Currency Exchange Rates





The
Company, operating in both the United States and Canada, faces exposure to
adverse movements in foreign currency exchange rates. These exposures may change
over time as business practices evolve and could materially impact the Company’s
financial results in the future. To the extent revenues and expenditures
denominated in other currencies vary from their U. S. dollar equivalents, the
Company is exposed to exchange rate risk. The Company can also be exposed to the
extent revenues in one currency do not equal expenditures in the same currency.
The Company is not currently using exchange rate derivatives to manage exchange
rate risks.





Interest
Rates





The
Company’s interest income and interest expense, in part, is sensitive to the
general level of interest rates in North America. The Company is not currently
using interest rate derivatives to manage interest rate risks.





ITEM 4. CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures
  Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15-d-15(e)) as of the end of the period covered by this
report. They concluded that,as of the end of the period covered by this
report, our disclosure controls and procedures were adequate and effective
in ensuring that material information relating to the Company would be made
known to them by others within those entities,particularly during the period in
which this report was being prepared. Management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and in
reaching a reasonable level of assurance, management necessarily is required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.





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 27




CHANGES
IN INTERNAL CONTROLS
  There
have been no changes in our internal control over financial reporting during our
fiscal quarter ended September 30, 2008 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
 
 Internal
Control Over Financial Reporting
 
 As at
December 31, 2007 and September 30, 2008, we had a material weakness related to
the segregation of duties of certain employees who had responsibilities within
significant processes affecting financial reporting. We also had a material
weakness resulting from our failure to implement controls to restrict access to
financially significant systems or to monitor access to those systems, which
resulted in conflicting access and/or inappropriate segregation of duties. These
material weaknesses affect all significant accounts. Due to these weaknesses,
our management believes our internal control over financial reporting is not
effective as of September 30, 2008.
 
 Our
management has discussed the material weaknesses described above and other
deficiencies with our Audit Committee.  In an effort to remediate the
identified material weaknesses, we have initiated plans to undertake the
following remediation activities:
 
 We have
established segregation of duties matrices and reviewed the job responsibilities
of our personnel to evaluate how to create more appropriate segregation of
duties, to the extent economically feasible given the size and complexity of our
operation.  To the extent technically and practically possible, we
limit user access in order to segregate duties within our IT systems and to
maintain appropriate corporate confidentiality.  Where that is not
possible, we plan to implement controls to verify that functions performed by
the same individual are appropriately monitored. In any case, our accounting
functions are maintained in a robust external audited system with its own
multiple levels of checks and balances. However; at this time, our resources and
size prevent us from being able to employ sufficient resources to enable us to
have adequate segregation of duties within our internal control system. The
Company intends to further remedy these material weaknesses by hiring additional
personnel and reallocating duties, including responsibilities for financial
reporting, among the Company’s personnel as soon as the Company has the
financial resources to do so and as soon as the Company’s operations grow to a
justifiable size. Management is required to apply its judgment in evaluating the
cost-benefit relationship of possible changes in our disclosure controls and
procedures. Our estimate of the anticipated cost of the remedial action required
to resolve these deficiencies is approximately $150,000.
 
 Other
than the material weaknesses indicated above, no accounting errors or
misstatements have been identified that would have a material effect on our
Consolidated Financial Statements.
 
 We have
documented this assessment and made this assessment available to our independent
registered Chartered Accountants. We recognize that all internal control
systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.





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 28





PART II - OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS





Brink
Transaction





On or
about June 18, 2008, the Company entered into a letter agreement (the “Letter
Agreement”) with Brink Energy Ltd. (“Brink”), a private Alberta oil and gas
corporation, with respect to a proposed Plan of Arrangement (the “Arrangement”),
in accordance with the Alberta Business Corporations Act, which provided for the
Company to acquire all of the outstanding shares of Brink (the “Transaction”).
Under the Arrangement, the holders of common shares of Brink (“Brink Shares”)
would have received for each Brink Share, at the election of the Brink
shareholder, either: (i) 0.411 of a common share of the Company, or (ii) $0.575
plus 0.2055 of a Company share, subject to an aggregate maximum amount of cash
paid to Brink shareholders of Cdn. $7 million. Assuming Brink shareholders had
elected to receive the $7 million maximum cash consideration, the balance of the
consideration for the Brink Shares would have been paid in common shares of the
Company. The Letter Agreement provided that a non-completion fee would be
payable by Brink to Kodiak, as liquidated damages, by way of a transfer of
Brink’s interest in certain lands in the event there was a breach or
non-performance by Brink of a material provision of the Letter
Agreement.





Further
in connection with the Transaction, the Company loaned $980,681 (Cdn. $1
million) to Brink, which loan was utilized by Brink to reduce its bank
indebtedness. The loan to Brink bears interest at prime plus 2%, is secured by
Brink assets and was subordinated to Brink’s bank indebtedness. The loan is also
convertible into common shares of Brink under certain
circumstances.





In a
letter dated August 18, 2008, Brink’s counsel, on behalf of the Board of
Directors of Brink, advised the Company that it was not going to proceed with
the Transaction.  On September 12, 2008, the Company filed in the
Court of Queen’s Bench of Alberta, Judicial District of Calgary, a Statement of
Claim against Brink in which the Company is claiming, among other things,
repayment of its loan, including accrued interest thereon, and the transfer to
the Company of certain lands of Brink in satisfaction of Brink’s Non-completion
fee obligation arising out of Brink’s termination of the Transaction. On
September 29, 2008, Brink filed in the Court of Queen’s Bench of Alberta,
Judicial District of Calgary, a Statement of Defence in which Brink denies all
of the allegations in the Company’s Statement of Claim. At the same time, Brink
filed a Counterclaim in which Brink claims, among other things, that Kodiak
breached covenants of the Letter Agreement and that Kodiak is obligated to Brink
for a Non-completion fee of $1 million. On October 7, 2008, the Company filed a
Statement of Defence denying all allegations made by Brink in its Counterclaim.
The parties are attempting to resolve this matter via negotiation of a
settlement.





The
Company is not presently a party to
any other litigation.








ITEM 1A. RISK FACTORS





Going Concern
Uncertainty





There is
uncertainty that the Company will continue as a going concern, which presumes
the realization of assets and discharge of liabilities in the normal course of
business for the foreseeable future. The Company has not generated positive cash
flow since inception and has incurred operating losses and will need additional
working capital for its future planned activities. These conditions raise doubt
about the Company’s ability to continue as a going concern. Continuation of the
Company as a going concern is dependent upon obtaining sufficient working
capital to finance ongoing operations. The Company’s strategy to address this
uncertainty, includes additional equity and debt financing; however, there are
no assurances that any such financings or divestitures can be completed on
favorable terms, if at all, or that the Company will generate positive cash
flow. These financial statements do not reflect the adjustments or
reclassification of assets and liabilities that would be necessary if the
Company were unable to continue its operations.







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The Oil and Gas Industry Is
Highly Competitive





The oil
& gas industry is highly competitive. We compete with oil and natural gas
companies and other individual producers and operators, many of which have
longer operating histories and substantially greater financial and other
resources than we do. We compete with companies in other industries supplying
energy, fuel and other needs to consumers. Many of these companies not only
explore for and produce crude oil and natural gas, but also carry on refining
operations and market petroleum and other products on a worldwide basis. Our
larger competitors, by reason of their size and relative financial strength, can
more easily access capital markets than we can and may enjoy a competitive
advantage in the recruitment of qualified personnel. They may be able to absorb
the burden of any changes in laws and regulation in the jurisdictions in which
we do business and handle longer periods of reduced prices of gas and oil more
easily than we can. Our competitors may be able to pay more for productive oil
and natural gas properties and may be able to define, evaluate, bid for and
purchase a greater number of properties and prospects than we can. Our ability
to acquire additional properties in the future will depend upon our ability to
conduct efficient operations, evaluate and select suitable properties, implement
advanced technologies and consummate transactions in a highly competitive
environment.





Financial Markets
Instability and Uncertainty





The
recent worldwide financial and credit crisis has reduced the availability of
capital and credit to fund the continuation and expansion of industrial business
operations worldwide. The shortage of capital and credit combined with recent
substantial losses in worldwide equity markets could lead to an extended
worldwide economic recession. A slowdown in economic activity caused by a
recession would likely reduce worldwide demand for energy and result in lower
oil and natural gas and other commodity prices. Any prolonged reduction in oil
and natural gas prices will depress the immediate levels of exploration,
development and production activity. That will impact negatively on our
Company’s ability to raise capital to finance our ongoing capital projects. If
the financial market conditions do not improve, we will face significant
challenges in meeting our ongoing financial obligations. This global financial
crisis may have impacts on our business and financial condition that we
currently cannot predict.





Government and Environmental
Regulation





Our
business is governed by numerous laws and regulations at various levels of
government. These laws and regulations govern the operation and maintenance of
our facilities, the discharge of materials into the environment and other
environmental protection issues. The laws and regulations may, among other
potential consequences, require that we acquire permits before commencing
drilling, restrict the substances that can be released into the environment with
drilling and production activities, limit or prohibit drilling activities on
protected areas such as wetlands or wilderness areas, require that reclamation
measures be taken to prevent pollution from former operations, require remedial
measures to mitigate pollution from former operations, such as plugging
abandoned wells and remediation of contaminated soil and groundwater, and
require remedial measures to be taken with respect to property designated as a
contaminated site.





Under
these laws and regulations, we could be liable for personal injury, clean-up
costs and other environmental and property damages, as well as administrative,
civil and criminal penalties. We maintain limited insurance coverage for sudden
and accidental environmental damages as well as environmental damage that occurs
over time. However, we do not believe that insurance coverage for the full
potential liability of environmental damages is available at a reasonable cost.
Accordingly, we could be liable, or could be required to cease production on
properties, if environmental damage occurs.





The costs
of complying with environmental laws and regulations in the future may harm our
business. Furthermore, future changes in environmental laws and regulations
could occur that may result in stricter standards and enforcement, larger fines
and liability, and increased capital expenditures and operating costs, any of
which could have a material adverse effect on our financial condition or results
of operations.






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The Successful
Implementation Of Our Business Plan Is Subject To Risks Inherent In The Oil
& Gas Business.





Our oil
and gas operations are subject to the economic risks typically associated with
exploration, development and production activities, including the necessity of
significant expenditures to locate and acquire properties and to drill
exploratory wells. In addition, the cost and timing of drilling, completing and
operating wells is often uncertain. In conducting exploration and development
activities, the presence of unanticipated pressure or irregularities in
formations, miscalculations or accidents may cause our exploration, development
and production activities to be unsuccessful. This could result in a total loss
of our investment in a particular property. If exploration efforts are
unsuccessful in establishing proved reserves and exploration activities cease,
the amounts accumulated as unproved costs will be charged against earnings as
impairments.





We Expect Our Operating
Expenses To Increase Substantially In The Future And May Need To Raise
Additional Funds.





We have a
history of net losses and expect that our operating expenses will continue to
increase over the next 12 months as we continue to implement our business plan.
In addition, we may experience a material decrease in liquidity due to
unforeseen expenses or other events and uncertainties. As a result, we may need
to raise additional funds, and such funds may not be available on favorable
terms, if at all. If we cannot raise funds on acceptable terms, we may not be
able to execute on our business plan, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements. This may
seriously harm our business, financial condition and results of
operations.





We Are An Exploration Stage
Company Implementing A New Business Plan.





We are an
exploration stage company with only a limited operating history upon which to
base an evaluation of our current business and future prospects, and we have
just begun to implement our business plan. Since our inception, we have suffered
recurring losses from operations and have been dependent on new investment to
sustain our operations. During the nine months ended September 30, 2008 and the
years ended December 31, 2007, 2006 and 2005, we reported losses of $1,593,958,
$2,775,663, $2,867,374 and $1,133,790 respectively. In addition, our
consolidated financial statements for the nine months ended September 30, 2008
and the years ended December 31, 2007, 2006 and 2005 contained a going concern
qualification and we cannot give any assurances that we can achieve profits from
operations.





Our Ability To Produce
Sufficient Quantities Of Oil & Gas From Our Properties May Be Adversely
Affected By A Number Of Factors Outside Of Our Control.





The
business of exploring for and producing oil and gas involves a substantial risk
of investment loss. Drilling oil wells involves the risk that the wells may be
unproductive or that, although productive, that the wells may not produce oil or
gas in economic quantities. Other hazards, such as unusual or unexpected
geological formations, pressures, fires, blowouts, loss of circulation of
drilling fluids or other conditions may substantially delay or prevent
completion of any well. Adverse weather conditions can also hinder drilling
operations. A productive well may become uneconomic due to pressure depletion,
water encroachment, mechanical difficulties, etc, which impair or prevent the
production of oil and/or gas from the well.





There can
be no assurance that oil and gas will be produced from the properties in which
we have interests. In addition, the marketability of any oil and gas that we
acquire or discover may be influenced by numerous factors beyond our control.
These factors include the proximity and capacity of oil and gas pipelines and
processing equipment, market fluctuations of prices, taxes, royalties, land
tenure, allowable production and environmental protection. We cannot predict how
these factors may affect our business.








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In
addition, the success of our business is dependent upon the efforts of various
third parties that we do not control. We rely upon various companies to assist
us in identifying desirable oil and gas prospects to acquire and to provide us
with technical assistance and services. We also rely upon the services of
geologists, geophysicists, chemists, engineers and other scientists to explore
and analyze oil prospects to determine a method in which the oil prospects may
be developed in a cost-effective manner. In addition, we rely upon the owners
and operators of oil drilling equipment to drill and develop our prospects to
production. Although we have developed relationships with a number of
third-party service providers, we cannot assure that we will be able to continue
to rely on such persons. If any of these relationships with third-party service
providers are terminated or are unavailable on commercially acceptable terms, we
may not be able to execute our business plan.





Market Fluctuations In The
Prices Of OilAndGas Could Adversely Affect
Our Business.





Prices
for oil and natural gas tend to fluctuate significantly in response to factors
beyond our control. These factors include, but are not limited to actions of the
Organization of Petroleum Exporting Countries and its maintenance of production
constraints, the U.S. economic environment, weather conditions, the availability
of alternate fuel sources, transportation interruption, the impact of drilling
levels on crude oil and natural gas supply, and the environmental and access
issues such as changes in government regulation that could limit or expand
future drilling activities for the industry.





Changes
in commodity prices may significantly affect our capital resources, liquidity
and expected operating results. Price changes directly affect revenues and can
indirectly impact expected production by changing the amount of funds available
to reinvest in exploration and development activities. Reductions in oil and gas
prices not only reduce revenues and profits, but could also reduce the
quantities of reserves that are commercially recoverable. Significant declines
in prices could result in charges to earnings due to impairment.





Changes
in commodity prices may also significantly affect our ability to estimate the
value of producing properties for acquisition and divestiture and often cause
disruption in the market for oil producing properties, as buyers and sellers
have difficulty agreeing on the value of the properties. Price volatility also
makes it difficult to budget for and project the return on acquisitions and
development and exploitation of projects. We expect that commodity prices will
continue to fluctuate significantly in the future.





Risks Of Penny Stock
Investing





The
Company's common stock is considered to be a "penny stock" because it meets one
or more of the definitions in the Exchange Act Rule 3a51-1, a Rule made
effective on July 15, 1992. These include but are not limited to the
following:(i) the stock trades at a price less than five dollars ($5.00) per
share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it is
NOT quoted on an automated quotation system sponsored by a national securities
association (NASDAQ), or even if so, has a price less than five dollars ($5.00)
per share; OR (iv) is issued by a company with net tangible assets less than
$2,000,000, if in business more than three years continuously, or $5,000,000, if
in business less than a continuous three years, or with average revenues of less
than $6,000,000 for the past three years. The principal result or effect of
being designated a "penny stock" is that securities broker-dealers cannot
recommend the stock but must trade in it on an unsolicited basis.





Risks Related To
Broker-Dealer Requirements Involving Penny Stocks / Risks Affecting Trading And
Liquidity





Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated there under by the Commission require broker-dealers dealing in
penny stocks to provide potential investors with a document disclosing the risks
of penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account. These rules may have the effect of reducing the level of trading
activity in the secondary market, if and when one develops.








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Potential
investors in the Company's common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stock." Moreover, Commission Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Pursuant to the
Penny Stock Reform Act of 1990, broker-dealers are further obligated to provide
customers with monthly account statements. Compliance with the foregoing
requirements may make it more difficult for investors in the Company's stock to
resell their shares to third parties or to otherwise dispose of them in the
market or otherwise.








ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





In July,
2008, the Company issued 2,000,000 common shares to Thunder River Energy Inc.
(“Thunder”) pursuant to the Company’s commitment to issue to Thunder common
shares of the Company upon the achievement of certain milestones in connection
with properties acquired from Thunder in September, 2007. Such shares were
issued at market value of $2.04 per share. See accompanying Consolidated
Financial Statements (Notes 10 and 13). The common shares were issued pursuant
to Regulation “S” (“Regulation “S”) under the Securities Act of 1933, as amended
(the “1933 Act”).








ITEM 3. DEFAULTS UPON SENIOR SECURITIES





None.








Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.








Item 5. OTHER INFORMATION





None.








ITEM 6. EXHIBITS





EXHIBITS





3.1 -
            Bylaw as amended effective September 10,
      200831.1
      -
            Certification of President and Chief
      Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
      -
            Certification of Chief Financial Officer
      to Section 302 of the Sarbane-Oxley Act of 200232.1
      -
            Certification of Chief Executive Officer
      and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002





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SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.








KODIAK
      ENERGY, INC.(Registrant)Dated:
      November 10, 2008
            
            /s/  William
      S. TigheWilliam
      S. TigheChief
      Executive OfficerDated:
      November 10, 2008
            
            /s/  William
      E. BrimacombeWilliam
      E. BrimacombeChief
      Financial Officer




















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